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We're all grossly ignorant about most things that we use and encounter
in our daily lives, but each of us is knowledgeable about tiny,
relatively inconsequential things. For example, a baker might be the
best baker in town, but he's grossly ignorant about virtually all the
inputs that allow him to be the best baker. What is he likely to know
about what goes into the processing of the natural gas that fuels his
oven? For that matter, what does he know about oven manufacture? Then,
there are all the ingredients he uses  flour, sugar, yeast, vanilla
and milk. Is he likely to know how to grow wheat and sugar and how to
protect the crop from diseases and pests? What is he likely to know
about vanilla extraction and yeast production? Just as important is the
question of how all the people who produce and deliver all these items
know what he needs and when he needs them. There are literally millions
of people cooperating with one another to ensure that the baker has all
the necessary inputs.

It's the miracle of the market and prices that gets the job done so
efficiently. What's called the market is simply a collection of millions
upon millions of independent decision makers not only in America but
around the world. Who or what coordinates the activities all of these
people? Rest assuredly it's not a bakery czar.

There are a number of ways to allocate goods and services. They include:
first-come-first-served, gifts, violence, dictatorship or lotteries.
When the price mechanism performs the allocation function, we realize
efficiency gains absent in other methods. The price mechanism serves as
a signaling function. Prices rise and fall, reflecting scarcities and
surpluses. When prices rise as a result of higher demand, this acts as a
signal to suppliers to expand output. They do so because whenever the
price exceeds the costs of production, they stand to gain. They ship the
goods to those with the highest willingness to pay.

Let's look at just one of the baker's needs  flour. How does the wheat
farmer know whether there's a surge in demand for bakery products? The
short answer is that he doesn't. All he knows is that millers are
willing to pay higher wheat prices, so he's willing to put more land
under cultivation or reduce his wheat inventory. In other words, prices
serve the crucial role of conveying information. Moreover, prices
minimize the amount of information that any particular player involved
in the process of getting flour to the baker needs in order to cooperate.

What if politicians thought that flour prices were too high and enacted
flour price controls in the wake of a surge in demand for bakery
products? Would wheat farmers put more land under cultivation? Would
millers work overtime to produce more flour? The answer is a big fat no
because what would be in it for them? The result would be flour
shortages, but the story doesn't stop there because mankind is ingenious
about getting around government interference. If there were flour price
controls, we'd see black markets emerging  people buying and selling
flour at illegal prices. That's always one effect of price controls.
Another would be the corruption of public officials who know about the
illegal activity but for a price look the other way.

In 302, the Roman emperor Diocletian commanded "there should be
cheapness," declaring, "Unprincipled greed appears wherever our armies
... march. ... Our law shall fix a measure and a limit to this greed."
The predictable result of Diocletian's food price controls were black
markets, hunger and food confiscation by his soldiers. Despite the
disastrous history of price controls, politicians never manage to resist
tampering with prices  that's not a flattering observation of their
learning abilities

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